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Commercial Real Estate seen falling 35%-40%

Green Street Advisors has put together an excellent deck [slide show] showing the coming mess for commercial real estate. Bottom line: A 35-40% decline in commercial real estate values should be “right.” And that’s if the market doesn’t overshoot.

The big problem in CRE is deals were funded using excessive valuations and high Loan To Value percentages. The funding is short-term, so the loans need to be re-financed within a few years. But valuations have dropped sharply, loans are much harder to get now, and the allowable LTV has dropped too. All of which means big trouble.

From the diagram. A loan in 2007 is for $100 million with 75% LTV. Thus, they owe $75 million. They need to re-fi in 2009. But the property is only worth $63 million now and the max LTV allowed is 60%. They can only re-fi for $38 million but they owe $75 million. So, “who will write this check” for the additional $37 million to pay off the original loan? That is the serious, growing problem that commercial real estate faces now.